Stop me if you've heard this one before: Uncertainty surrounding the Affordable Care Act is beginning grow once again.
The ACA, better known as Obamacare, has been fully implemented on an individual basis for about two-and-a-half years now, and the results of its implementation show a mix of positives and negatives.
On the plus side, about 12.7 million people chose to enroll via Obamacare's marketplace exchanges in 2016, and a near-equal number of individuals and their families have gained coverage via the expansion of Medicaid in 31 states. Having so many people gain access to health insurance over such a relatively short period of time has pushed the uninsured rate to a new low. Gallup's latest poll pegged the uninsured rate at 11% in the first quarter of 2016, down from 17.1% in the quarter immediately preceding Obamacare's implementation, whereas the Centers for Disease Control and Prevention listed the uninsured rate at just 9.1% (although the CDC includes Medicare patients in its tally).
Conversely, Obamacare has also made life tougher for millions of Americans. The individual mandate, which requires individuals to purchase health insurance, has led non-compliant Americans to pay a growing penalty come tax time. Beefed-up minimum benefit requirements on Obamacare marketplace exchanges also caused millions of people to lose their longtime health plans and/or required them to change primary care physicians.
But the linchpin of Obamacare's success or failure continues to be the law's affordability.
How high could Obamacare premiums go in 2017?
When Obamacare was first signed into law in March 2010 and introduced a few years later, it was heralded as a way to expand healthcare coverage and keep premium cost inflation down. It would do this by making the shopping process for health insurance plans as transparent as possible and encouraging insurers to compete with one another. The risk corridor was also expected to play a key role in encouraging competition by financially supporting struggling insurers between 2014 and 2016. Ultimately, Obamacare was expected to greatly reduce the uninsured rate, lower premium inflation, and be a boon to healthcare companies, from insurers to hospitals.
Years later, some of Obamacare's expectations have come true. The uninsured rate is much lower than it was before. However, premium inflation is soaring, and it's only expected to get worse in 2017.
As we've looked at recently, insurers in a number of states have requested double-digit percentage premium hikes, on average, for 2017. It'll still be up to each state's Office of the Insurance Commissioner to approve these requests, but given the billions of dollars lost by insurers on Obamacare's exchanges since 2014, the justification for many of these hikes is probably reasonable.
So what sort of inflationary jumps are we talking about in 2017? Although we don't have all of the state-level data in yet, the Kaiser Family Foundation examined the lowest-cost and second-lowest-cost silver plans in 14 major cities for which we do have data, and compared this data to the two cheapest silver plans in 2016.
The findings? Per KFF, the average lowest-cost silver plan is slated to rise in price by 11% in 2017 on a weighted basis, with the biggest jumps being seen in Portland, Oregon. (26%), Washington, D.C. (21%), and New York City (16%). For the second-lowest-cost silver plan, an average increase of 10% is expected across the 14 major cities examined. Portland residents could feel the brunt of these increases after a double-digit percentage premium increase in 2016 as well.
Why healthcare premiums are rising
It would be nice if a single issue could be blamed for Obamacare's expected soaring premiums in 2017, but it's actually a confluence of factors.
To begin with, young-adult enrollment has been subpar since Obamacare became the health law of the land. Young adults are typically healthier and less likely to use their insurance or visit the doctor. Therefore their enrollment is critical, as their premium dollars help offset the costs of treating older and/or sicker individuals. Although young-adult enrollment improved in 2016, it's still lagging where insurers expected it to be.
The Shared Responsibility Payment (SRP) could arguably take some blame, too. In 2014, the penalty for not having insurance was the greater of $95 or 1% of modified adjusted gross income, or MAGI. By 2016, the SRP has jumped to the greater of $695 or 2.5% of MAGI. KFF estimates that penalties in 2016 could near $1,000. Still, even at nearly $1,000, the SRP is considerably lower than purchasing even the cheapest insurance plan, potentially causing holdouts to remain firmly on the sidelines.
Obamacare also opened the floodgates for sicker individuals to get coverage. Before Obamacare, insurers could deny coverage to consumers with pre-existing conditions. Under the ACA, this practice is no longer allowed. Thus, when Obamacare was implemented, a flood of previously uninsurable people were accepted into the healthcare system. For insurers, this has greatly increased costs, and it's a big reason why UnitedHealth Group (NYSE:UNH) is pulling out of most of the 34 states it's operating in during 2016 by 2017. A study by Blue Cross Blue Shield Association earlier this year suggests that Obamacare members cost BCBSA about 22% more than people insured through employer-based plans.
The risk corridor has been another sore point. The risk corridor was designed to be funded by overly profitable insurers to help support insurers that were losing money, but the risk corridor program wound up being massively underfunded. Of the $2.9 billion requested by insurers, just 12.6% wound up being paid out. This caused more than half of Obamacare's approved healthcare cooperatives to close up shop. Without this financial incentive, attracting new competition could be difficult.
Lastly, the lack of a universal expansion of Medicaid is hurting Obamacare's potential. Individual states have the right to decide whether to expand Medicaid, meaning those states that choose not to expand are leaving potentially millions of people without access to affordable healthcare options.
What you can do about it
The big question is: What's the consumer or investor to do in the face of rapidly rising premium prices?
The roughly 85% of Obamacare enrollees who are expected to receive the Advanced Premium Tax Credit will be mostly shielded from the effects of premium price hikes. In 2016, the average monthly premium for subsidy recipients rose by just 4%. This bodes well for investors, because it means the vast majority of Obamacare enrollees will continue to stay within the program, and the federal government will pick up the slack on rising premiums.
The gray area comes into play when discussing the nearly 2 million people enrolled in Obamacare without a subsidy, or the millions more who are enrolled on private exchanges. These individuals have no shielding whatsoever from a hike in premium prices. The best recourse for these individuals will be to shop around.
When KFF conducted its analysis of the aforementioned 14 major cities, it also examined whether the plans that cost the least and second-least in 2016 were still among the two cheapest silver plans in 2017. In both cost categories, KFF found that six of the 14 plans were no longer among the cheapest two. This means that if consumers simply allowed themselves to be re-enrolled, they could be paying more than needed for similar coverage. The lesson is simple: Don't assume. Check your options annually, because plan prices change from year to year.
Additionally, if you're receiving subsidies and make between 100% and 250% of the federal poverty level, you'll want to ensure that you're enrolled in a silver plan. Persons making between 100% and 250% of the federal poverty level likely qualify for cost-sharing reductions, which help lower the cost paid for copays, coinsurance, and deductibles. Cost-sharing reductions are only offered through silver plans.
We'll have a better idea of what sort of premium inflation to expect later this summer, but it's sure looking as if we're on the precipice of the biggest jump in individual healthcare premiums in more than a decade.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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